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Software licensing - what's the problem?

IT Management: Supplier Relationship Management

by Mike Simons

Software licensing - what's the problem?

Change is the order of the day as software suppliers seek to protect revenues with new contract arrangements while anti-piracy measures get ever tougher. So what's the outlook for the user caught up in such interesting times?

Software licensing is a perennial source of grief for IT directors. Year after year we've heard complaints about "stiffing," where software suppliers use any change in a customer's business to extract more money from licences, and aggressive anti piracy measures from organisations such as the Business Software Alliance.

This year the issues are more fundamental than dealing with opportunistic and exploitative software suppliers. They are rooted in the long-term strategic and technical vision of the software suppliers.

They see Web services and software-as-a-service as the future. These promise predictable, long-term revenue streams from existing customers in the face of saturated markets and the global economic slowdown.

Existing forms of software licensing are unlikely to cope with the growth of Web services, which depend on accurate measurement of usage.

Facing up to the future

To reach their future suppliers are adopting a twin track approach - trying to establish subscription-based licensing models while at the same time extracting maximum value from the software they have already sold.

Users are not helpless in the face of this, but they need to raise their game if they are to cope with the new environment. In the last year both Microsoft and Oracle have been forced by user opinion to make hurried changes to subscription licensing plans.

Microsoft has twice delayed the replacement of enterprise agreements -which end with the user owning the software - with the Software Assurance licence where the user is locked into a continuous upgrade cycle and never owns the program.

Microsoft chief executive Steve Ballmer has admitted the company had little choice in the matter: "People said 'either you make changes or we'll go to the opposition or we just won't upgrade'."

Faced by the backlash Microsoft has struck special deals with the National Health Service, Ministry of Defence and some blue-chip companies including the Royal Bank of Scotland.

It is still negotiating with the Treasury's Office of Government Commerce and Socitm, the local government IT directors' organisation. But while Microsoft is offering special deals to its largest customers, many businesses are being left out in the cold.

Peter Scargill, IT vice-president of the Federation of Small Business, says: "Half of Britain's workforce are employed by small companies. Those companies spend a lot on software and they are not represented in negotiations with Microsoft."

Oracle too has struggled to strike a balance between the demands of its own bottom line and those of its customers. Last year, under user pressure, Oracle changed its database licensing to a model based on processor power.

Last month it again responded to user demands by announcing a new licensing regime offering different pricing for power and occasional users of its 11i applications suite, but the move left many users sceptical.

Some suppliers are making more subtle changes to their licensing. Borland's new licences, for example include increased powers to audit the use of software at customer's premises.

This does not surprise John Marwood, partner at IT law specialists Tarlo Lyons. "In good times software suppliers may have been quite happy to waive their right to an audit. However, when revenue streams begin to slow, they need to find alternative ways to beef up their bottom line," he warns.

"An obvious way is to revisit their customers' use of software and to undertake an audit to confirm compliance."

The point was echoed by analysts group Gartner last month in a briefing paper issued in response to a new initiative from the Business Software Alliance, the software vendors' anti piracy organisation.

Vendors chase pirates' treasure "In tight economic times software vendors will look at every avenue that might help them generate revenue and ensuring that customers pay for all copies of their software in use provides one such route," warned Gartner.

"Microsoft, the world's largest software vendor, has made aggressive pursuit of software pirates a priority."

The Business Software Alliance, funded by Microsoft, Symantec, Adobe, Corel, Autodesk and Macromedia, is spearheading that drive. The latest organisation it named and shamed was Clackmannanshire Council in Scotland, which was ordered to pay close on £150,000 in fines and licence fees after it purchased invalid Microsoft licences.

The BSA's tactics have, for many years, upset IT directors. They involve approaching chief executives of organisations rather than IT directors, trying to get user organisations to fill in an annual software audit and publicly exposing those found not to be compliant.

David Roberts, chief executive of The Infrastructure Forum, a user group of FTSE 500 companies, says: "There is an absolute requirement on organisations to have their software licences in order, but there is no requirement to register with the BSA. No business would knowingly use unlicensed software."

He advises users: "Any contact from the BSA should be ignored. Their phone calls should not be returned and their letters thrown into the bin."

That advice is echoed by other user groups, but ignoring organisations like the BSA is not going to be enough in 2002.

Anti-piracy initiatives will not go away, nor will the suppliers' efforts to fundamentally recast the way software is licensed.

Mike Newton, the BSA's campaign manager, estimates that half the £350m suppliers lose to unlicensed software is through unwitting use by companies. Not surprisingly, he is promising to keep up the pressure.

Check up and cash in

The short-term prescription for user organisations is to be whiter than white. Philip Virgo, strategic adviser to the Institute for the Management of Information Systems, says this is not just a defensive measure.

"People should update their software audits now," he advises. "It should be done as a matter of good housekeeping, not as a result of fear or threats. With all the downsizing that has been going on, a properly conducted audit will probably reveal surplus licences and you could end up paying less, not more. It can be a quick win."

Gartner puts it bluntly. "Show that your firm doesn't pirate software," a recent First Take note urged. It recommends that organisations immediately:

Establish an audit response team and involve the legal department.

Use autodiscovery, inventory and usage tools to determine what software is installed, what software is in use, and by whom.

Reconcile inventory figures with purchasing records to give an accurate picture of usage.

Implement as part of a long-term strategy an IT asset-management repository that links to inventory and usage records.

Recover licences from retired hardware.

Develop or institute a software compliance policy that includes a component that holds employees liable for illegal software usage.

Renegotiate pricing when significant business or technical changes threaten non-compliance.